Introduction
The law of contract that establishes the operating provisions of a contract is a facilitative law rather than a mandatory law. In that vein, contracts are entered into by parties through mutual agreement and consent. The parties are given the opportunity to set their own conditions and terms and reach an agreement that is binding and enforceable by a court of competent jurisdiction.
Objectives of this research
The objectives of this research are to:
- Examine elements of a valid contract.
- Provide a comprehensive and critical examination of some of the cases already head in the Supreme Court and which are related to business law.
- Define some terminologies that are related to business law.
- Examine some of the vitiating elements of a contract.
Research question.
This paper will answer the following research questions.
- Explain basic elements of a contract.
- List information which ought to be included in a contract.
- Explain the sources of law governing contracts
- Examine conditions for an offer.
- Explain the parole evidence rule
The contractual parties are always given the opportunity to set their own conditions and terms and reach an agreement that is enforceable by law.
However, even with the freedom to set their own terms and conditions, the contract entered into by the parties must have salient features of contract that make it valid and enforceable by a court of competent jurisdiction. These features are the basic elements of a contract which shall inform the subject of discussion in this section. Primarily there are six basic elements of a contract. These are; offer, acceptance, consideration, legal capacity, legal relationship and intention to contract.
Elements of A contract
The offer refers to the service and or commodity the offeror avails to the party and from which he intends to earn a return on. It is the willingness of an individual to enter into an enforceable agreement with the other party. .The offer must be actively given by the party. This is essential for purposes of distinguishing a valid offer and a mere invitation. This is because for the offer, the acceptance of which binds the offeror to live to the expectations of the offerrer. However, for the mere invitation to treat it is treated as a pre-offer and the offeror would consequently give an offer premised on the invitation to treat. This will entitle the offerrer to decline acceptance and hence dispense with the binding effect of a contract. An offer can be treated in three main ways. One can accept the offer hence give a valid acceptance. Alternatively, one may reject the offer and collapse the agreement before entering into a contract. Lastly, one may alter the conditions of the offer in what the law considers a counteroffer. The effects of a counteroffer are to invalidate the previous offer and issue a new offer all together. This should be divorced from an acceptance and a counteroffer lacks the binding effect in an acceptance.
Acceptance is the second elements of a contract. An acceptance refers to manifestation of assent to the terms and conditions of the offer as made by the offeree in a manner required by the offer. An acceptance has the effect of establishing a contract between the parties in the contract. After the acceptance of the offer, parties, the offerrer and the offeree are bound by the terms and conditions of the contract. It is prudent to note that acceptance of the offer should not in any way alter the terms of the offer. An acceptance must be voluntary. This is to say that the acceptance must be voluntarily and willingly be submitted by the parties that received the offer. An acceptance needs to be distinguished from a counteroffer. This is because in many cases, the tendency often is to confuse an acceptance and a counteroffer. While an acceptance binds the parties to the contract, a counteroffer lacks the binding effect.
The third element of a contract is the consideration. While the offer relates to the service and or commodities provided by the offeror, the consideration refers to the return and or detriment suffered by the offerrer in the contract. Consideration, therefore, is the offerrer’s contribution to the contract. The law of contract has established some rules in relation to consideration. Some of the most essential rules in relation to consideration is that consideration must be adequate and not sufficient and that consideration must be good and not past consideration. The adequacy of consideration is a protection of the law to prevent unscrupulous business people from exploiting other persons. In addition, consideration needs to be present and not past and must be good consideration.
The fourth element of a contract is the legal capacity to contract. Legal capacity has two characters. These are age and the state of mind. The rule of the thumb states that the parties must be of the age eighteen years above for them to enter into a contract. However, the capacity in relation to age has an exception in necessities. Parties under the age of the minority can contract for necessities and pay a reasonable consideration for the services and commodities. In relation to state of mind, capacity entails the state of being sane and the state of being sober. The rule is that insane and drunk persons cannot enter into contracts as parties. However, a similar exception lies for necessaries.
The fifth element of a contract is the legal relation. The parties in the contract must have a legal relationship for the contract to enforceable. A legal relationship need to be distinguished from a social relationship. A legal relationship is predicated on the law while the social relationship is based on social factors. Lastly, the sixth element is the intention to contract. This refers to the parties’ intention to establish a binding contract between themselves having satisfied all the operating factors of a contract. The intention to contract must be real and not merely apparent. Whether an intention to contract suffices or not depends on the character and circumstances of the contract and is a question of fact for the court of law to determine.
Information to be included in a contract
The following information should be available in a standard contract.
Document title; the title of the contract should outline the main purpose of that contract document. The title should always be placed on top of the contractual document.
Identification of the parties; this part of the contract is very crucial. It contains information regarding the identifications of the individuals entering into a contract. The parties involved ought to specify their identification here.
Recital; this part should appear in the contractual document. It contains information regarding the background of the transaction being carried out. It also specifies certain facts regarding the agreement being made.
The agreement; in this section, information regarding the terms of agreement is stated. Outlines the purpose of the document, description of the equipment, the exchange price and terms of exchange.
Terms of contract; this section of the documents contains information regarding the terms of contract. For instance, it contains information regarding the effective date of contract and expiration date of the contract.
Default and remedies; this section of the contractual document contains information regarding conditions which are to constitute default of the contract.
Compliance with laws; this section of the contractual document affirms that the parties to be involved in a contract have agreed to abide with the rules and regulations pertaining to this agreement.
Confidentiality; this section of the contractual document contains information regarding any confidentiality requirements pertaining the conditions for the transfer of property.
Authorized signatures; the parties involved should append their signatures in the relevant section of the contractual document.
The above elements are some of the pertinent information which ought to be included in a contractual document.
Explain the sources of laws governing contracts
Some of the causes of laws governing the contracts include.
Common law. This was developed in the English Law courts.
Legislation.
Definition of Terms
Contract
According to contract is defined as a legally enforceable and voluntary promise made by two or more parties in order to provide terms of the promise for exchange of something of value known as consideration. This implies that if the parties enter into a contract, then the parties are obligated to perform the terms and conditions of the contract. In the event that one party fails to adhere to complete the obligation, then the injured party may find reprieve in court.
Parties
This refers to the offeror and the offerrer in the contract. The offeror is the one that gives the offer and receives the consideration. The offerrer accepts the offer and pays the consideration. The rule of privity of contract only acknowledges these two broad parties to a contract.
Bilateral and Unilateral
These terms arise in the contract in relation to a number of issues between the parties. For instance in instances of mistakes in the contract, where only one party is mistaken, it is a unilateral mistake and where both parties are mistaken, it is a bilateral mistake. In addition, the terms denote the number of parties involved in the contracting. For the unilateral contracts, only one party is in consensus with the details of the contract while for the bilateral cases, both parties are in consensus.
These terms describe the nature of the contract agreed upon. For the formal contract, the details are purely formal often accompanied by written agreements and provisions while the informal contract is less formal and at times merely oral.
Valid and Unenforceable
A valid contract is one that is enforceable by law. It is a contract which satisfies all the elements required of a contract. A valid contract is binding to all the parties involvedIt has the backing of the law and would, therefore, be enforced by a court of law. However, an unenforceable contract is invalid and cannot be enforced by a court of law. Often, a contract is rendered an unenforceable when it misses any of the elements of the contract previously discussed.
Executory and Executed
These terms refer to the duration of the performance of the contractual terms relative to the contracting period. For the executory contract, the performance is yet to be met by the contacting parties. For the executed contract, the terms have all been met at the contracting period and the contract has no future connotations and transactions. In that context, the contract is settled upon fully at that point.
Legality
Parole evidence rule
The rule relates to the oral submissions that are external to the written contract. It applies in cases where disagreements arise in the course of contracting. According to the parole evidence rule, the evidence that adduced in form of terms, conditions and or issues in connection with the contract would not be admissible unless they are contained in the written contracting documents.. This rule appears to justify the popular assumption that the written version of a contract takes precedence in cases of inconsistency with the oral contract. In addition, it is required by the law that writing of the contract takes into consideration all the fundamental issues in the contract in the form of terms and conditions. However, this rule does not apply in a vacuum. The court must observe the background of the contract and the condition which dictate the oral evidence admissibility. For instance, in Gilberto v Kenny the court admitted parole evidence despite its omission in the written contract.
Assignment of rights
An assignment of rights is an exception to the rule of privity of contract. In the assignment of rights, one of the parties in the contract, transfers either voluntarily or by operation of the law his rights and duties in the contract to a third party. Upon the assignment of rights, the duties and rights belong to the assigned party who is now considered privy to the contract. The assignor losses his rights to the contract. The assignment of rights derives from either legal or equitable assignment of the rights. Strict conditions have been enforced for the assignment of rights to be held valid and legal. Some of the conditions include; the communication of the assignment to the other party to the contract in writing, the observation of the legal process of the law and the fact that the assigned party must equally bear the characters and capacities of a contracting party. An assignment is equally revocable using the provisions of the law. However, before revocation, the assignment confers all the rights previously held by the assignor to the assigned party and the other party is disallowed from invoking the concepts of privity of contract on the assigned party. In many cases, assignments have been used by courts to settle legal injustices such as offsetting one’s debts upon being declared bankrupt, among others.
Delegation of duties
Delegation of duties arises in respected of executory contracts. These are contracts that are set to be performed. The delegation entails the transfer of the duties of one party to another which is not part of the contractual agreement. Delegation arises under a number of circumstances but must have been entertained in the form of the contract agreed on. It is imperative to note that some contracts expressly prohibit the delegation of the contractual performance to another party. However, it is equally instructive to note that delegation of performance does not transfer the contract from one party to the other. The initial party that delegates, often called the delegator still retains his rights in the contract and can still sue for non-payment and similar cases. This marks the distinction between delegation and assignment. In delegation, the subject of transfer is the performance and not the rights in the contract while in assignment; the subject of transfer is the rights and not the performance. The concept of delegation is an equitable concept intended for the solution of modern problems that arise in contract.
Exculpatory Clause
Exculpatory clause is a contractual clause often included in the contract that exempts a party from a potential liability. An exculpatory clause in that context attempts to minimise potential liabilities. This often comes about because of the uncertain conditions and circumstances that accompany the performance of a contract. The law does not expressly give provisions for the manner in which exculpatory clauses can be set. However, the law at a general level does not allow parties to exclude themselves from liabilities for matters that are to the root of the contract. To that extent, the practise often is that parties exclude themselves for liabilities that relate to matters incidental and not central to the terms of the contracts. This character of the law is informed by the fact that parties often enter into commercial transactions with their interests at heart. In that context, they would undertake to minimize their liabilities to the best extent possible to the detriment of the other counterparts in the contracting. In overall the court will examine the clause on a case by case basis. The spirit of the court often is to analyse the degree of reasonability of the clause. The court seeks to ensure that both interests of the parties are balanced. The question of reasonability of an exculpatory clause is a question of fact to be determined by the courts.
Unconscionability
The concept of unconscionability arises as a defense to cases of contract. It is a defense relied on a party in upon reneging to perform his end of the contract on the grounds of existence of a set of conditions that are considered grossly unfair. Although what is unfair is relative and depend on the circumstances of the case and the totality of the case, it is expected that the court will establish what is unfair using a general scale. The defense is predicated on the assumption that contracts are often entered into mutually on a willing basis and that the parties submit to the contract with the full knowledge of the repercussions. In that context, courts are often slow to give remedy to this defense. Courts often prefer to examine other issues connected to the contract such as the presence of the six elements in the contracts or any cases that in sum or in isolation can vitiate the agreement. However, this does not imply that courts do not entertain the defense of unconscionability. In cases where the party pleading the defense proves to the court the presence of excessive unfairness, the court would allow the defense. In addition, unconscionability can be allowed in reference to a defect in the elements of the contracts or a presence of a vitiating factor in the contract.
Privity of contract
This refers to the general rule that only parties present and participating in the formation of the contract can seek for its enforcement. On that premise, it is the practise of the law to only recognise the offerrer and the offeror. However, there are a number of exceptions to the rule of privity of contract as enunciated in cases of assignment of contract, contracts of insurance of third parties, among others .
Vitiating factors of a contract
Vitiating factors refer to a set of factors which in isolation or altogether may render the contract void and voidable at the option of the injured party. A contract is void if on the surface it cannot be enforced by a court of law and is not recognised a valid contract. A contract is voidable if it has a defect that can be remedied at the election of the injured party or can be rendered void at his option. Vitiating elements include issues such as duress, undue influence, misrepresentation and mistake. Duress entails the contracts in which a party enters into out of threats or force. Undue influence relates to contracts in which the relationship between the parties may compromise one party from bargaining effectively. Misrepresentation entails situations in which one or both parties relied on a false set of facts in entering the contract while mistake relates to the reliance of a non-existent set of facts in entering the contract.
Supreme Court Cases of Contract
American Export Company v Italian Colors Restaurant
This is case was a Supreme Court appeal from the Appellate Circuit Courts seeking an interpretation of the legality of the Appellate Court’s ruling. The question presented for the court to address was whether the Federal Arbitration Act allowed courts to invoke the federal substantive law arbitrarily. The contention was on whether the courts could enforce parties to pursue arbitration alternatives even though the parties themselves were not signatories of to arbitration as a dispute resolution mechanism. The court granted the appellants the certiorari holding that the lower courts had erred in their decision to subject the parties to arbitration despite their non-signatory status.
General Dynamics v United States of America
What’s at stake?
The increased growth of secrecy by federal government so as to limit access to justice.
The issue concerning this case was whether the government had the power to invoke the secrets doctrine of the state so in order to avert a party from raising a defence to a claim.
The case originated from a contract in which General Dynamics and McDonnell had signed in order to build eight planes for the navy at a cost of$4.4 billion. However, after three years, the navy defaulted the company and then cancelled the contract. Therefore, the two parties have been trading blames on each side. For instance, the government said that the company was unable to produce the aircraft on time. The government also alleged that they were unable to design the required aircraft. However, the company complained that the government was responsible for the delays because they refused to share some of the essential stealth technology. The case then found its way to court where it was ruled in favour of the government .The Supreme Court ruled that the federal government could invoke the state secrets privilege so as to prevent a contractor of the government from raising a defence for breach of contract by the government. The Supreme Court ruled in favour of the government without addressing the defence of the contractors. The main reason for this ruling was because the court found that if they allowed the contractors’ defence to proceed, then they could risk exposing the government secrets.
Therefore the Supreme Court authored by Justice Scalia unanimously ruled in favour of the government. They held that allowing the case to continue would expose the government secrets.
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